St. John Knits Accepts Buyout After Founders Increase Offer
St. John Knits Inc. said Wednesday it has accepted a sweetened offer from the founding Gray family to buy the maker of upscale women’s clothing and take the firm private.
The Irvine company’s board accepted a bid from Chief Executive Robert E. Gray, his family and Vestar Capital Partners to acquire the bulk of the company for $30 a share, or $522 million. In December, the Grays had offered $28 a share.
If the deal is accepted by shareholders, the private investment firm Vestar will claim a 77% stake in St. John, a family-operated business launched 36 years ago by Robert Gray and his wife, Marie St. John Gray. The Grays would continue running the business.
The Grays and their daughter Kelly, the company’s 32-year-old president and signature model, together would own about 16% of the financially restructured company, slightly more than their current 13.6% stake.
Robert Gray, 73, has said he moved to take St. John private because he wants to slow its growth, a concept that generally does not thrill Wall Street. The deal would also allow the company to pursue long-term growth options without fretting over short-term financial results, Vestar said.
“I’m very happy,” said Robert Gray, whose offer finally won the board’s approval late Tuesday night after the deadline had been extended four times. “We’ll be able to do what we think is best for the company as opposed to what Wall Street might feel.”
St. John is the second major Orange County firm this week to agree to a buyout bid that will take it private. On Tuesday, apartment developer Irvine Apartment Communities accepted a sweetened offer from its chairman, billionaire developer Donald L. Bren.
The St. John proposal was controversial from the start, with some analysts and investors saying the original $28-a-share bid was too low. On Wednesday, the higher price also drew fire.
“It’s still way under its true value, in my opinion,” said Jerome Dodson, president of the Parnassus Fund, one of St. John’s largest shareholders with about 325,000 shares. “If we think our rights have been violated by this low-ball offer, then we’ll take the appropriate legal action.”
Dodson said he spoke Wednesday with other shareholders who also are unhappy.
“I think Mr. Gray and his partners are going to face some very strong opposition,” he said, “not only from us but from other major and small shareholders as well.”
Robert Gray, however, called the deal an “outstanding” opportunity for the shareholders and predicted they will endorse it when it comes to a vote in May or June.
“I’d be shocked if they didn’t,” he said.
Despite criticism, the company said an independent committee formed to consider the deal received opinions from Merrill Lynch & Co. and Wasserstein Perella & Co. that the higher offer is fair.
The Grays started the company in a garage in 1962 after Marie St. John bought a knitting loom and began creating her Chanel-like designs. Robert Gray, then her fiance, shifted the enterprise into gear when he began selling the clothing to department stores.
In 1989, with Robert Gray suffering health problems, the couple sold their growing business to Escada for $45 million. The German apparel company took St. John public four years later.
The Grays have remained intertwined with the company. Marie Gray, 62, is the company’s vice chairwoman, secretary and lead designer. Kelly Gray, in addition to her current duties, is heir-apparent to her father’s job.
Today, St. John operates 17 boutiques and nine outlet stores, as well as selling through high-end department stores. While St. John has expanded and enjoyed sturdy earnings and sales growth during most of its history, the company’s pristine reputation was singed over the last year by unflattering news about quality control problems that resulted in some flawed garments being recalled.
The company’s stock took a beating last year when St. John announced it would not meet analysts’ expectations in the second and third quarters, the first time that had happened. Robert Gray said the company was trying to grow too quickly, which had caused a drop in quality and higher expenses, which ultimately hurt profits.
The dreary news continued throughout the fiscal year. Financial results for the fourth quarter ended Nov. 1 showed a drop in profit for the first time ever.
Profits fell 35% to $7.13 million, or 42 cents a share, compared with $10.97 million, or 64 cents a share, the same quarter the year before. For the year, St. John’s profits also dropped for the first time, slipping 3% to $33.4 million, or $1.94 a share, from $34.4 million, or $2.10 a share in fiscal 1997.
Sales have continued to rise, climbing 16% in fiscal 1998.
Robert Gray said he wants to narrow the sales growth rate to 8% to 10%, instead of its 25% historic annual growth, and focus on the quality of St. John’s products, which include knit suits, evening dresses, sporty outfits, shoes and accessories.
The day after the Grays made the buyout offer, the company’s stock jumped 22%, or $4.81 a share, to $26.75. Since then, shares have hovered between $25.38 and $27. The stock closed Wednesday at $27.56, up $1.56, in New York Stock Exchange trading.
St. John has also been hammered by lawsuits of late, including five linked to the buyout offer. It was unclear how the litigation might affect the deal.
But experts indicate there could be smoother times ahead for the Grays if they are successful in taking the firm private and out of the public arena.
“In general, entrepreneurs who start companies want to run their companies,” said James G. Manegold, a USC accounting professor who is an expert in privately held businesses. “They don’t want to be subject to discussions with financial analysts, underwriters, the SEC [Securities and Exchange Commission], and so on.”
Moreover, Vestar--which usually stays linked to a company for five to seven years--would not be investing in the firm unless it felt confident about St. John’s future, observers said.
A good venture capital company generally expects overall returns for its investors of about 25% to 35%, said Chris Manning, professor of finance at Loyola Marymount University in Westchester.
“A company like St. John has to have a very good chance of giving that kind of return to be of interest to venture capitalists,” Manning said. “This is not a company that’s getting out of the game, so to speak.”
Experts say Vestar may be expecting St. John to move into a stronger position and then go public again or be purchased by another company.
“The venture capital company would not be going in if they did not have a way to get out,” Manning said.
In one of the other bonuses to taking the company private, St. John said it would save the more than $250,000 it spends annually to prepare and file paperwork required of publicly held companies.
As part of the deal, Vestar will provide about $154 million of equity financing and Chase Manhattan Bank and Chase Securities Inc. will arrange $340 million of debt financing.
Current shareholders will have an opportunity to retain about 7% of the company, Vestar said.
Because of the way the deal is structured, the company may be required to file quarterly and annual financial reports with regulators.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Mixed Picture at St. John Knits
The Gray family’s buyout of St. John Knits Inc. comes after a year when the company’s earnings declined for the first time since it went public in 1993. Sales, however, have continued to climb. The company’s stock price has experienced some wide swings during the year. Sales and earnings trends in millions; weekly stock closing prices:
*--*
Sales Earnings 1993 $100.3 $11.1 1994 $128.0 $15.0 1995 $161.8 $19.6 1996 $203.0 $27.1 1997 $242.1 $34.4 1998 $282.0 $33.4
*--*
****
Weekly Stock Closes
Feb. 6: $39.75
Feb. 13: $42.38
Feb. 20: $42.19
Feb. 27: $42.25
March 6: $44.50
March 13: $42.38
March 20: $47.19
March 27: $46.56
April 3: $47.75
April 10: $47.25
April 17: $46.50
April 24: $44.00
May 1: $44.63
May 8: $43.06
May 15: $43.56
May 22: $43.19
May 29: $38.44
June 5: $38.50
June 12: $38.25
June 19: $39.50
June 26: $39.75
July 3: $39.31
July 10: $40.44
July 17: $39.13
July 24: $35.31
July 31: $34.13
Aug. 7: $31.13
Aug. 14: $27.81
Aug. 21: $27.88
Aug. 28: $19.88
Sept. 4: $18.44
Sept. 11: $17.75
Sept. 18: $17.00
Sept. 25: $16.81
Oct. 2: $15.75
Oct. 9: $13.81
Oct. 16: $13.63
Oct. 23: $18.44
Oct. 30: $20.19
Nov. 6: $19.31
Nov. 13: $18.38
Nov. 20: $18.00
Nov. 27: $19.63
Dec. 4: $20.88
Dec. 11: $26.38
Dec. 18: $26.00
Dec. 25: $26.00
****
1999
Jan. 1: $26.00
Jan. 8: $26.50
Jan. 15: $26.56
Jan. 22: $26.69
Jan. 29: $26.50
Wednesday close: $27.56
****
Key Company Dates
1993
March: St. John Knits Inc. becomes a public company; its stock opens at $17 per share.
1996
April 22: Kelly Gray, daughter of St. John founder Robert Gray, replaces Robert C. Davis as president.
April 23: Company’s stock drops 7.5%.
1997
Aug. 6: St. John agrees to become majority owner in Amen Wardy Home, an Aspen, Colo., operator of home furnishing boutiques.
1998
May: Company says quality-control problems have forced a costly recall to repair some clothes. Defects were discovered in February, repaired and returned to stores over two months.
June: St. John announces it will open a manufacturing plant in Mexico to cut labor costs.
August: Stock price plunges 30% after company announces it expects to report disappointing third-quarter earnings.
October: Amen Wardy Jr., former chief of St. John’s home stores subsidiary, files wrongful termination suit and charges improper accounting procedures were used to shore up the company’s bottom line.
November: St. John files countersuit claiming Wardy diverted assets and sexually harassed an employee.
Dec. 8: Gray family offers to buy stock it does not own for $28 a share, or about $490 million; company’s stock is trading at about $22.
Dec. 17: Wall Street analysts and big investors say Gray family offer is inadequate.
1999
Jan. 8: Lawsuit against Grays and other company executives claim family offer is unfair and harmful to other stockholders; it is the third such suit since the Grays made their offer in early December.
Feb. 3: SJK accepts sweetened offer from the Gray family to buy the company for $30 per share or $522 million.
Sources: Bloomberg News, Times reports
Researched by LOIS HOOKER / Los Angeles Times
